Company not entitled to a deduction for directors' superannuation - Kelly (No 2)

03 Jul 2012

The Federal Court (Besanko J) has held that a company trustee was not entitled to a deduction for superannuation contributions that it made on behalf of its non-employee directors. As a result, the matter was remitted to the Commissioner to determine the extent of the additional income attributable to the taxpayer as the default beneficiary of the trust.

In an earlier decision - Kelly v FCT[2012] FCA 423 (27 April 2012) - the Court had formed a tentative view that the contributions were not deductible, but gave the taxpayer a further opportunity to make submissions as to why they were proper deductions.

In the decision under consideration, the Court noted that directors were not "employees" within the ordinary meaning of the word and therefore the availability of a deduction under the ITAA depended on whether the directors were "employees" for the purposes of s 12 of the Superannuation Guarantee (Administration) Act 1992. Section 12(2) of the latter Act provides that a "person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is, in relation to those duties, an employee of the body corporate."

The Court held that there is a well-established principle at common law that directors of a company are not entitled to claim remuneration from the company for services performed unless specifically provided for in the company’s constitution or approved by shareholders. Neither condition was satisfied in this case. In particular, payment did not equate with "entitlement".

The Court noted, at para 28:

"It is true, as the [taxpayer] points out, that under the trust deed for the Kelly Family Trust the trustee is given the power to pay superannuation to directors in the case of a corporate trustee. However, that is not to the point in considering whether the provisions of subs 12(2) of the Superannuation Guarantee (Administration) Act are engaged where it is the company’s constitution which is relevant, and indeed, decisive."

Accordingly, the Court held that the superannuation deduction was not an allowable deduction within the provisions of the ITAA 1997.